February 24, 2010 / 1:53 PM / 8 years ago

UPDATE 4-Garmin sees drop in margins; shares fall

* Q4 adj EPS $1.43 vs est $0.95

* Disappointed by nuvifone sales

* Sees most R&D investment in nuvifone in 2010

* Shares fall as much as 9 pct

By Sayantani Ghosh

(Adds conference call details, analyst comment, updates share movement)

BANGALORE, Feb 24 (Reuters) - No. 1 U.S. navigation device maker Garmin GRMN.O warned that falling prices and increased competition would hurt margins in 2010, sending its shares down as much as 9 percent.

The personal navigation market -- once a duopoly of Garmin and Dutch rival TomTom TOM2.AS -- has become increasingly crowded, with Google GOOG.O and Nokia NOK1V.HE joining the fray by offering turn-by-turn navigation software for free.

Garmin expects prices to decline by about 10 percent in the PND industry, putting pressure on its gross and operating margins in 2010.

It also projected flat to slightly declining revenue for its core personal navigation device (PND) segment during the period.

“I think the PND business will decline over time but not as fast as people expect,” Deutsche Bank analyst Jonathan Goldberg told Reuters over the phone.

“With time the PND business will become much smaller -- a niche business, with good profits, high margins, slow growth -- very similar to their outdoor products.”

On a call with analysts, a Garmin official said the company expects margins at its core automotive/mobile segment to fall by a further 2 to 3 percentage points in 2010.

The severity of the decline in its PND business forced Garmin to foray into the smartphone market last year with the nuvifone, pitting it against the likes of Apple’s AAPL.O iPhone and Research in Motion’s RIM.TO BlackBerry.

The company, however, said it was disappointed by the sales of the nuvifone till date but added that it would spend most of its R&D dollars in this business in 2010.

“I think the incremental R&D dollar will be shunted more towards their other businesses and to the nuvifone, which will be given at least another year to prove its viability,” Oppenheimer & Co analyst Yair Reiner said.

The company plans to launch two more models of the phone in the first half of this year.

For 2010, Garmin expects earnings of $2.75 to $3.15, excluding items. Analysts were expecting a profit of $2.69 a share. It forecast overall revenue growth of up to 5 percent for 2010, topping Street expectations.

Shares of the Cayman Islands-based company were trading down almost $2.20, or more than 6 percent, at $32.25 in afternoon trade on Nasdaq.

Garmin’s shares are usually volatile on the day it reports earnings, and short interest on the stock has risen to about 10 percent of the total float. By comparison, blue-chip technology stocks such as Google and Apple have short interest positions below 2 percent.

Q4 TOPS STREET

For the fourth quarter, the company posted earnings of $1.43 cents a share, excluding items, beating analysts’ expectations of 95 cents a share, according to Thomson Reuters I/B/E/S. [ID:nWNAB1042].

Gross margins for the period rose by more than 4 percentage points to 46 percent as price declines slowed. Revenue from its biggest segment - automotive/mobile - fell 2 percent to $812 million.

“The strong fourth quarter provides a ray of hope that the PND segment may still have some life left in it,” Reiner said.

Garmin sold 6.6 million units in the fourth quarter, driven by PND unit growth in North America and Asia, putting total units sold in 2009 at 16.6 million.

Assuming a 10 percent growth rate, as suggested by the company in early December, it should sell about 18.3 million units in 2010.

Last week, TomTom posted healthy quarterly results as it sought to downplay the threat of competition from free software on mobile phones. [ID:nLDE61G1ZN] (Additional reporting by Savio D‘Souza; Editing by Saumyadeb Chakrabarty)

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